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Court of Appeal rules on indefinite demurrage claims

A Court of Appeal decision handed down on Wednesday of this week ruled that demurrage on detained containers, which could not be redelivered to the carrier, did not accrue indefinitely. The Judges held that, after about seven months in the circumstances of that case, the commercial purpose of the contract was frustrated by the shipper’s breach in failing to redeliver the containers: demurrage ceased and damages (the value of the lost containers) were payable.

Summary

Demurrage on containers does not continue indefinitely.

The test for the end of the contract (and so the liability for demurrage) is when the commercial purpose of the contract is frustrated – in commercial terms, the containers in this case were deemed “lost” after seven months and could no longer be redelivered in accordance with the contractually agreed timescale.

The case may have implications for hire and demurrage payments on long-term detained vessels as well as containers.

It will be of interest in other cases where a party is said to have “no legitimate interest” in continuing to insist on performance of a commercial contract.

Facts MSC and Cottonex contracted for the carriage of 35 containers of raw cotton to Chittagong, Bangladesh, which were shipped under 3 bills of lading and arrived at the discharge port between May and June 2011. Cottonex received payment for the goods and title in the cotton passed to the consignee. However, the consignee did not take delivery of the goods and the containers were left at the port under the control of the customs authorities, where they apparently remain to this day.

On 27 September 2011, Cottonex informed MSC that it did not have legal title to the goods, indicating that it could not or would not deal with the goods. MSC, however, continued to insist on the redelivery of the containers and said that demurrage would continue to accrue until they were redelivered. Eventually, on 2 February 2012, MSC offered to sell the containers to Cottonex in order to break the deadlock, though no sale was ever agreed.

MSC issued a claim in the English Court for demurrage accrued under the terms of the bills of lading up to 30 April 2013 in the sum of US$577,184 and continuing to accrue, or so it alleged, at a daily rate of US$840 until the containers were redelivered. At trial, it was agreed by the parties that replacement containers were available at Chittagong at all material times at a cost of US$3,262 each.

Whether Cottonex was in repudiatory breach of the contract (for failing to return the containers); and

If so, to what extent does the aggrieved party have discretion whether to accept the repudiation or to affirm the contract and keep it alive (so claiming demurrage indefinitely);

Repudiation Leggatt J held that Cottonex had repudiated the contracts of carriage on 27 September 2011 when it informed MSC that there was no realistic prospect of it being able to redeliver the containers, that the delay at that point was “so prolonged as to frustrate the commercial purpose of the adventure and that the shipper was therefore in repudiatory breach of all the contracts of carriage”.

Legitimate interest Leggatt J went on to state that once there was no realistic prospect that Cottonex would perform its remaining primary obligations, i.e., to redeliver the containers, MSC did not have a “legitimate” commercial interest in keeping the contracts of carriage alive in the hope of future performance.

Leggatt J also considered whether the right to demurrage according to the terms of the bills of lading was penal but decided that it would only be so if MSC had the right to claim demurrage indefinitely. As this right was not an unfettered right, but was limited by the “legitimate interest”, the demurrage clause was not a penalty.

Damages As a result of the Judge’s findings, MSC was entitled to recover demurrage for the period between the expiry of the agreed free time and 27 September 2011, when there was no longer a legitimate interest in keeping the contract open for performance as well as the value of the containers, measured by the replacement cost.

The claimant was granted permission to appeal and a hearing was held on 25 May 2016.

Court of Appeal decision On 27 July 2016, Lord Justice Moore-Bick delivered the leading judgment, which again found that the claim for demurrage could not continue for an indefinite period of time. However, the reasoning was somewhat different.

1. Frustration, repudiation and affirmation revisited The Court held that the key date was not 27 September 2011. It might not have been clear from Cottonex’s statement that it did not have title. That it could not or would not redeliver the containers. More importantly, however, the commercial purpose of the contract had not, by then, become frustrated. September 2011 was too early – while the periods of delay varied, this was only 2 ½ months after the last containers had been discharged and, in the absence of some special circumstances such a relatively short period of delay was not sufficient.

However, on 2 February 2012, MSC offered to sell the containers to Cottonex to resolve the situation. It was at this stage that “the commercial purpose of the adventure…had become frustrated” because “in commercial terms the containers had been lost. They could no longer be redelivered in the context of the original adventure (if at all).” Consequently Cottonex was “in repudiation of the contract as from that date” as the frustration arose as a direct result of Cottonex’s breach of the contract of carriage.

Once the contract was frustrated/repudiated, it had come to an end. Any attempt by MSC to affirm it and keep it alive was in vain. This is to be contrasted with the position where a contract remains capable of performance, when the innocent party has an option whether to accept the repudiation. Accordingly, demurrage ceased to be payable at this date. MSC was awarded demurrage from the end of the free period until 2 February 2012 only and damages by reference to the cost of replacement containers.

2. Legitimate interest As a result of the findings on frustration, it was not necessary to consider the relevance of the principle of “legitimate interest”. Nevertheless, Lord Justice Moore-Bick did state that if it had been open to MSC to affirm the contract after 2 February 2012, he would have agreed with Leggatt J at first instance that there was no legitimate interest to do so, saying that “this is a classic case in which it would have been wholly unreasonable for the carrier to insist on further performance”.

Other issues of general importance

Good faith

At first instance, there had been some indication from the Judge that there was “an increasing recognition in the common law world of the need for good faith in contractual dealings”. Though strictly unnecessary to do so, Lord Justice Moore-Bick dampened this potential development of the law, saying that “the recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences”, and warning that “there is, in my view, a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement”.

Mitigation

An argument was run by Cottonex at first instance that MSC could and should have taken steps to mitigate its loss by minimising the duration for which demurrage ran, either by retrieving the containers for itself, or obtaining replacement containers. Leggatt J held, however, that MSC had no duty to mitigate because the right to demurrage arose under a liquidated damages clause, thus the duty to mitigate was excluded in its entirety.

This view was confirmed on appeal, with the Judge stating that “the daily rate of demurrage was agreed on the assumption that it was sufficient to compensate the carrier in full for” its “profit-earning chattel”. Therefore, an attempt to mitigate by purchasing additional containers would not compensate for such loss – it would simply add to the overall stock. There was, therefore, no duty of mitigation.

Importance to the shipping and commodities industries It is clear from this case that while a shipper who fails to redeliver containers to the carrier in breach of the contract of carriage will not easily be absolved of his liability for the demurrage payable, nor will the shipper be indefinitely liable for such loss. In the event that containers are detained, it will be important for each party to identify whether and when the circumstances show either that the contract can no longer be performed or that the likely delay will make performance radically different from that agreed under the contract of carriage. Accordingly a shipper may look at whether it is able to take any action to help release the containers, or whether its ability to do so really has ceased. If it has, it must make that very clear to the carrier and decide whether to offer to pay for replacement containers, as a way of attempting to bring the contract to an end.

From the carrier’s point of view, it equally cannot just sit back and use demurrage as an indefinite income stream – it must be practical and look to see how the position can be resolved and what action could be taken by the shipper or consignee or by the carrier itself to end any impasse. When it is clear that the delay is so prolonged that the commercial purpose of the contract has been frustrated, both parties should seek to reach an agreement on the ending of demurrage and payment for lost containers.

Shippers should also be aware of the terms of their sale contracts. Can liability for demurrage be passed to the buyer? If so, how do the terms match to those of the bill of lading? Can all demurrage be passed on, or only some, and how do dates match? It is necessary to be aware also of different time limits in sale contracts and bills of lading for the commencement of claims – a shipper as seller may wish to commence a protective arbitration claim against its buyer to avoid being time-barred if the claim from the carrier is not pursued for some years.

Further, the Court is likely to take account of what the parties said and did during the delay, and not just the fact/length of delay. As a result, the parties should consider a suitable flow of messages: for example from the shipper/consignee leading to the conclusion of frustration of the contract purpose or from the carrier indicating the failure to exhaust steps ultimately permitting redelivery of the containers.